The Bank of Japan (BOJ) released yesterday one of the closely-watched reports by market participants. The BOJ Outlook Report comes out quarterly, and traders value it for the insights provided on the Japanese economy and inflation.
Yesterday’s report is of particular importance as it follows an interesting hint from the BOJ at the start of the trading week. On Monday, financial media reported that the BOJ intends to let longer-term yields rise, easing its Yield Curve Control (YCC) measures.
The Japanese Economic Performance in Q4 2020
To start with, the projected growth rates are higher than the ones on the previous report in October 2020. Effectively, it means that the BOJ sees a gradual economic recovery despite the second wave of the pandemic taking its toll on the Japanese economy. Also, Japan faced severe winter conditions, as seen by the increase in the energy prices as households consumed more for heating.
As such, the economic outlook remains unclear, mostly dependent on the pandemic’s evolution. The idea is that the BOJ, just like other central banks, bases its economic models on the fact that the virus will wane gradually – just an assumption, not a certainty at this point. Because of that, the BOJ sees the risks for the economic growth as skewed to the downside.
On the inflation front, the Consumer Price Index (CPI) is projected to remain unchanged and in negative territory. The pandemic only deepened the deflation crisis in Japan, a country fighting one of the most vicious deflationary spirals.
For the local currency, the Japanese Yen (JPY), the report did not create the volatility expected. The Yen trades with a bid tone since the start of the year, especially against the USD. The USDJPY pair reflects the weakness in the dollar, and not much has changed so far in January when compared to the end of the previous year.
Also, the uncertainty about the transfer of power in the United States left investors in a stand-by mode. Now that a new administration is in place, the market may turn its focus to the elephant in the room – the pandemic.
All in all, the report, as well as the BOJ monetary policy report, failed to bring volatility to the JPY pairs. However, the month is not over and, judging by the change in the YCC policies; we may be just at the start of a new bold move on the JPY FX pairs.